Sunday, March 21, 2010

Kucinich on Stossel

This week's Stossel (on Fox Business network) talked a lot about Cleveland, and what was wrong with the city. The city's population was something like 2 million around 1950, but has dwindled by more than half, and is now ranked by some publications as the worst city in America. Stossel's proposition was that it was higher taxes, excessive regulations, and inefficient government services that caused the decline.

Stossel brought on the former mayor of Indianapolis, another city located in the region but which has been doing well. In the 90's, that mayor had privatized many functions that the government used to do -- golf courses, waste disposal, etc. He said they started looking through the phone book, and if at least 3 private businesses offered the same service as the government, they privatized it.

But to get to the point of my post, I was interested to learn that nutcase House Democrat and former presidential candidate Dennis Kucinich was the former mayor of Cleveland. In fact, he was the mayor at a time when Cleveland defaulted on their debts back a couple decades ago because he refused to sell city property or reduce government spending.

At the end of Stossel's show there was a Q&A segment with the audience. One of the members asked Kucinich what he didn't like about privatization. Kucinich said that the problem with privatization is that private companies want to make profits and that to do so they will lower workers' wages and raise prices.

So while I always thought of private businesses as entities that are forced to earn business by offering the best service at the best price, I realized that a lot of people focus instead on their incentives to keep labor costs down and profits up as a bad thing.

The problems I see with this "Kucinich view" (which I fear is shared by way too many Americans):

1. Businesses that cannot compete (offer a desired good or service at a price people are willing to pay) go out of business. Government services that can't compete (offer as good of quality service at the same or lower cost than private business) don't go away. They stick around and continue to offer worse service at a higher cost.

2. Government wages that are higher than the private labor market rate are really benefiting those workers at the cost of taxpayers. How is that fair to the taxpayer?

3. Why should government's goal be to keep public sector wages higher? Shouldn't the goal be to offer public services at the lowest cost? Wouldn't this include keeping labor costs down? Of course the government will always be forced to pay wages competitive with the private sector in order to recruit and retain public sector employees, but what is the argument for paying wages higher than that?

4. Government takes from taxpayers via force (threat of fine or imprisonment) in order to provide services, so when it uses taxpayer money to fund services that a taxpayer doesn't want or use, it is really stealing from the taxpayer or forcibly directing what they spend their money on. That is why government services should be limited to core public services that are truly serving a very high percentage of taxpayers.

5. Profits are kept in check by competition. It is a very rare instance where a business has no competition (a monopoly). Businesses can only make a profit to the extent they can keep costs down better than their competition (operate more efficiently) or are willing to accept a lower profit margin.

6. Wage rates are also maintained by competition. Businesses cannot retain quality employees without paying as much as their competitors are paying.

7. For those that think that non-profits or government can provides services at a lower cost to the taxpayer because they aren't taking a profit, that assumes (most of the time incorrectly) that the waste and inefficiency in government or a non-profit entity is less than the profit margin of the more efficient for-profit business. But what if, for example, a business with a 8% profit margin runs a service 15% more efficiently than government?

I believe the fairest and most efficient economic system is the free market where wages and prices are dictated by market forces -- that is, in the labor market, what employers are willing to pay and employees are willing to work for, and in the markets for goods and services, what the buyer is willing to pay and the seller willing to sell for. Government should reasonably minimize the amount of interference via regulation, and only provide core public services like roads, police, and parks that for various reasons are better offered by government than by private businesses.